An US investor invests in a Japanese stock. DC: USD, FC: JPY If I apply ICAPM to get E® of the stock for US investor. What are “gamma” and gamma L C? My understanding Gamma: the sensitivity of return of Japanese stock (in USD) to the change in JPY Gamma LC: is the sensitivity of return of Japanese stock (in JPY) to the change in JPY Can SB pls let me know if I am correct and not confusing myself? Thanks
i THINK you are right. I do know that gamma = gammaLC+1
I am not 100% on this, but I think this is how it is If you are an investor in the US and are investing in Japan, you personally will have an exposure of 1:1; ie every 1% the yen appreciates is a 1% gain for you. You must also consider the LC sensitivity which is a measure of how the company that you have invested in, located in japan, reacts to changes in the japanese yen. For example lets assume the stock’s price will increase .2% if the yen increases 1% So now if the yen increases 1% - you will make 1% on the currency as well as .2% on the company because of the increase in the yen; for a total increase of 1.2% in the value of your investment Does this help?